M&A

Valassis Sues to End ADVO Merger

Acquiring company Valassis says its partner "misrepresented" financials; ADVO calls the lawsuit a smokescreen.
Marie LeoneAugust 31, 2006

The engagement lasted less than two months.

Consumer marketing company Valassis Communications has filed a lawsuit in Delaware Chancery Court to break up a $1.3 billion merger deal with direct-mail company ADVO Inc. In the suit, Valassis alleged that ADVO management “materially misrepresented the financial health of the company and failed to reveal internal controls deficiencies,” according to a press statement.

The suit claims that ADVO “intentionally” provided Valassis with “materially false financial information” and “withheld material information” at a time when the operating income was materially off forecast. The complaint further alleges that ADVO executives knew of, but did not disclose, significant internal control deficiencies associated with ADVO’s enterprise-wide order-to-cash system, noted the press release.

In a regulatory filing, Valassis also claimed that ADVO is in breach of certain sections of the July 5 merger agreement, which entitles Valassis to terminate the pact. “ADVO left us with no choice,” said Valassis chairman, president, and CEO Alan Schultz, in a statement. “The pertinent information we received was erroneous, projections were grossly inaccurate and we believe we were the victims of fraud,” he continued.

However, ADVO officials rejected Valassis’ claim that it has grounds to back out of the deal, and called the lawsuit “baseless and without merit,” according to a statement. ADVO concluded in its statement, that “Valassis’ action is merely a smokescreen to hide the fact that Valassis is suffering from an extreme case of buyers’ remorse.” The company stressed that it remains committed to the merger, and “will take action to enforce that agreement and vigorously defend itself” against the claims.

Calls to Valassis and ADVO by CFO.com were not immediately returned.

In the merger pact, which was agreed to by both boards, Valassis agreed to purchase all of ADVO’s outstanding shares for $37 per share in a cash deal that included approximately $125 million in existing ADVO debt which Valassis expected to refinance. On the day the merger agreement was signed, ADVO’s stock price closed at $24.26.

The stock dropped nearly 24 percent yesterday on news of the lawsuit, closing at $26.16 after hitting $36.80 earlier in the week.

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